Sole Proprietorship

A sole proprietorship can be defined as any unincorporated business with a single owner. It's the most common structure for small businesses.
A business organized as a sole proprietorship is not separate from the owner, but merely a different name with which the owner represents him/herself to the public. The owner is the business and the business is the owner - inseparable.
If your business has only one owner, the IRS will presume that it's a sole proprietorship unless you incorporate under state law. From the IRS's perspective, the business is not a taxable entity. Instead, all of the business's assets and liabilities are treated as belonging directly to the business owner. When tax time rolls around, all income and expenses generated by the business are reflected on either Schedule C, Profit or Loss from Business, or Schedule C-EZ, Net Profit from Business. Whichever of these forms you use, it must be included as part of your annual individual tax return (Form 1040). On both of these forms, your gross revenue from sales and other business income items are reported on the top of the Schedule C or C-EZ. Expenses of the business are subtracted from income to arrive at the net profit (or loss) figure at the bottom of the form. The net profit or loss is then carried over from the Schedule C or C-EZ and reported on page one of the business owner's 1040. This means that there is no separate tax rate schedule that applies to a sole proprietorship - the business owner's individual tax rate will determine the amount of tax paid on the earnings of the sole proprietorship.
The main advantage of a sole proprietorship is simplicity. Because there is only one owner, the accounting rules are much easier to understand and to use. Also, a business owner may transfer money in or out of the business with no tax effects to keep track of.
Note: When you pay yourself as a sole proprietor, you simply withdraw money from your business checking account - you don't have to issue yourself a paycheck and make payroll tax deductions. Similarly, if you decide to contribute some personal money to the business, you can simply add it to your checking account - you don't have to formally make (and keep track of) your capital contribution as you would with a partnership or a corporation, at least as far as the IRS is concerned.
Sole proprietors are generally required to pay self-employment taxes on all of the business's net profits, as computed on Schedule C or C-EZ. You must use Schedule SE of the annual income tax return to compute and report these taxes.
Since they have few legal requirements, sole proprietorships are easy to form and operate. They can also be more affordable since there are no legal documents to file in most cases. Basically, all one has to do is get a business license and begin operations.
Although the sole proprietorship does have the advantage of simplicity, the negatives can steer the entrepreneurs away from this form of business operation. The disadvantages of a sole proprietorship stem from its nature – the business and the business owner are inseparable. This leads to three potential problems.

Owners can lose some lucrative tax free fringe benefits because they cannot participate in company funded employee benefit plans like medical insurance and retirement plans.
Since the owner and business are inseparable, anyone who sues the business sues the owner.The owner’s personal exposure is unlimited.
The business owner is personally responsible for the debts of the company and; unfortunately, personal assets can be taken to pay company obligations.